Saving Up Is Hard to Do

Blog Series

‘Saving’ is both a noun and a verb. If you want savings (the noun) you first have to make them (the verb). If you’re rich it’s not hard to make savings, because you have many tools for the job, such as automated deductions from salaries. So the rich focus on the noun – making sure that the savings they have enjoy the best mix of accessibility, security and returns. And because most of their spending is covered by their remaining regular income, they can hold their savings over the long term, dedicating them to large-scale expenditures in the future.

It’s different if you’re poor. You may not have a steady income, let alone a regular job, so you cannot delegate the making of savings to some automated procedure. You have to focus daily on the verb, struggling to squeeze money from a small and unreliable income and to find a place to keep it safe and out of reach. And because your income arrives in amounts big enough to cover only your most basic expenditure, you need to build savings not just for large-scale future needs, but also for things like clothing and schooling and visits to the doctor. Most of the sums that you build through savings are spent as soon as they are formed, rather than held for the long term. The financial lives of the poor are dominated by the need to build usefully large sums of money for immediate expenditure.

‘Saving up’, or setting money aside until it grows into a usefully large sum, is hard to do. An alternative is to ‘save down’ – to set money aside to repay a loan rather than build a pot of savings. A loan is, essentially, an advance against future savings, and for a number of reasons saving down (borrowing) can help ensure that those savings really are made.

First, borrowing provides you outside help with the discipline you need to make the savings, since the lender has a strong interest in getting you to (re)pay and will take steps to make sure you do. Second, with a loan you get the lump sum up-front, so borrowing provides you with certainty that the lump sum that you will build through saving is indeed created, and not lost, stolen or blocked. Third, borrowing is timely: you get the lump sum now, when you need it, not after a laborious and uncertain saving effort.

A crucial fourth advantage has been added by modern microcredit: the act of saving (the verb) is made much easier by being broken down into small bite-size amounts that can be found out of the normal household cash flow, and are collected frequently (often weekly, sometimes daily) and close-to-home (in the village or slum), in an unusually reliable way. Microcredit offers you an unprecedentedly convenient way of wrapping up many weeks’ worth of small savings into a usefully large lump sum that can be spent on whatever need is most pressing. No wonder it has proved so popular with so many poor households.

Still, risks and disadvantages abound. Recent events in India point to one risk – that if the poor’s unquenchable need to form lump sums is matched by lenders eager to disburse abundant funds as fast as possible, there aren’t enough checks and balances in the relationship to prevent people from getting into too much debt too quickly. But even under normal circumstances, many poor people dislike the risks and obligations and costs of debt and would like to form a much bigger proportion of their lump sums through conventional savings plans.

Why don’t poor people save more than they borrow? Lack of access to suitable accounts is the most obvious reason, but even where such accounts are available poor people may borrow more and save less than they would like. SafeSave, an MFI that I established in the slums of Bangladesh, is even-handed with regard to the two modes of forming a lump sum: clients are given a daily opportunity to save or to repay loans, or both. The value of client savings held in SafeSave exceeds the portfolio of loans outstanding, but the value of transactions on the loans side far outweighs that on the savings side. SafeSave clients borrow-and-repay much more than they save-and-withdraw. Why?

Many clients tell SafeSave researchers that they’d like to save more and borrow less: it’s less stressful, cheaper, provides a greater sense of security, and lump sums formed that way don’t need to be repaid. But they constantly fall into a liquidity trap. They save, but when the next urgent spending need arrives their accumulated savings aren’t enough to satisfy it, so they borrow. Now, with the need to make repayments added to the constant pressure of regular expenditure, their capacity to save is constrained even further, and so the cycle deepens and repeats.

There must be something we can do about this if we’re serious about helping the poor to save. Something that combines what modern microcredit teaches us – how reliable, close-at-hand tools bring discipline and frequency to the task of mopping up as many small set-asides as possible – with a response to what SafeSave’s clients tell us about the liquidity trap. My own efforts are described at Please go there, take a look, and devise something better.


07 September 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Stuart
It is very interesting to me to observe the approach to adopt a novel micro saving services linked with micro loan for the poor and the findings on the various research questions raised for pilot products P5, P7 and P9.. I would like to share a few points for further discussion on Savings(noun) of the poor in general and raise a few research questions on the functioning of the innovative P5,P7 and P9 being experimented in Safe save clients households in particular for further learning
Mode of saving (noun)
1. The literature on the portfolio of the poor covers by and large their financial transactions or financial practices and hence the savings and borrowing practices of the poor also reflect how they manage /operate their financial asset transparently in the book of accounts. Where as in the given mufti faceted poverty while looking at much closer to socio cultural profile of the poor , it is revealed that the form of ‘savings(noun) is of two kinds, one in cash (finance) and other in ‘kind’(non finance) in terms of various kinds of livestock , gold ornaments, land etc) . Here it may be noted that as much as the key features of financial savings, the kind savings too enjoy the best mix of accessibility. return, reliability, security, inflation protection besides with ‘timely’ and ‘certainty’ convertibility to liquidity for dedicating them to large scale expenditure.
2. As a corollary to the above, most of the sums, built through savings are not necessarily spent as soon as they are formed since there is a preference to keep some part or full of it in kind form either as gold or livestock for meting long term social expenses like wedding of girl children. ( inevitable gift in the form of gold ornaments to the bride represents social status in poor community ) Since part of financial savings is likely kept in kind form traditionally even in very poor households, the fact is not reflected in financial management of the poor and consequently there may not be expected growth of savings in the books of accounts. From this angle, I feel therefore ‘hard to make financial savings up’ ( Saving profile of Safe save clients in Dhaka slum may be different )
3. The suggested alternative for ‘save down’ be means of repayment of loan, bears lot of assumption a)normal business cycle with productivity of loan and income generation from the business activity financed b) the quality of the ‘interest’ of lender/collector in the recovery process – a kind of forced ‘discipline’ ( lessons from AP crisis in India and two cautionary tales from Bangladesh posted by Stuart in this blog Feb 28,2011) c) influence of covariant risk and idiosyncratic risk on the small business financed by ‘modern micro credit’ or in the process of saving (verb) in the absence of micro insurance coverage
4. Pertaining to the ‘ why don’t the poor save more than they borrow?’ I assert that among others, the reasons may include influence of electronic media with non-stop product intrusion leading to conspicuous consumption (‘the television at a rate of five minutes of commercials for every 15 minutes, obviously ‘fuels’ the propensity to consume’-Marc Roesch & others)entertainment, gambling and liquor consumption take a major share for emptying the saving and over borrowing. It is not uncommon to find this fact in urban slums be it Hyderabad in India or Dhaka in Bangladesh for that matter. The recent study by Micro save India on ‘No Frills Account’(NFA) an official special drive for promoting savings in the process of financial inclusion among the poor community reveals that majority of the accounts are inactive or dormant and in most areas, only 20% or fewer use their accounts for small savings, the NFA’s original intention. The reasons attributed include unsatisfactory bank services and usage of this account only channel of getting government benefits. This situation also may be responsible for harder growth of savings and point out mere existence of savings account in the bank ‘books, does not necessarily continue to be active contributing growth in savings for the various points discussed above.
5. Research question on the Safe save project products P5,P7 &P 9 given in the web site
Shohoz Schnchoy’s P5- The findings for the research questions, given, are interesting. However one additional question. With the given small/micro business clients, would physical environment (supporting services for income generation) available in the service area affect the productivity of the product and the capability of the client for effective utilization of the loan and savings services?
P7. The assumption that mere ‘’reduction in interest rate’ has to lead more repayment is questioned. Although this reduction of rate acts as an incentive to the micro borrowers, the repayment is by and large more influenced by the sustained income generation with surplus for saving from the activity financed and sustainable income generation of the activity again largely hinges on open market condition (demand, sales, price etc) In such a condition, how are their small business influenced by the market condition in the project area? Do the micro trader clients enjoy monopoly over their product sale and enjoy regular visit of their customers in them given market environ? Would these factors also influence the level of repayment of loans and level of savings of the clients?
P9 In Kalyanpur incidence of fire has been reported in two sections of the slum. However the vulnerability to fire accident is not an uncommon phenomenon for the slum dwellers and the impact of fire would be the worst for their livelihood. In such a case, would you contemplate introduction of micro insurance also along with micro saving and loan products to ensure a protected and rejuvenated livelihood for the slum poor?
Last,a)can we draw any lessons from the present business poor households in the project area for promoting savings ( noun &verb) for the non business poor households with a seasonal earning pattern elsewhere ? b) In general, in view of prevalence of unethical consumption like liquor, gambling, wasteful entertainment affecting very much poor man’s capacity to save in the poverty segments, can we consider ‘ethical teaching’ to these poor segments as a part of their welfare activities?.

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